ADBI-JFSA Joint
Conference
March 8, 2013
Session 2
Post-crisis Regulation of Financial
Institutions in Japan
Toshihide Endo
Financial Services Agency, Japan
March 8, 2013
* Any views expressed in this presentation are those of the speaker, and do not
represent the official views of JFSA.
Chronology of Events in the 1990’s
Japan’s Non-Performing Loan Problem in the 1990’s
Cause: Real Estate Bubble
Over loan by banks through their non-bank subsidiaries
(housing finance companies)
The 1990’s Onset and increasing seriousness of the non-performing loan problem
(The authorities did not get the picture of the size of NPLs and the seriousness)
1995
Injection of approximately ¥680 billion in public funds to deal with
bankrupt housing finance companies
1996
Protection of all deposits (pay-offs frozen)
1997 (Jul.) Thailand: Devalued the Baht
(Oct.) Hong Kong: 10% fall in stock market
(Nov.) Japan: Bankruptcies of Hokkaido Takushoku Bank, Yamaichi Securities
Korea: Exchange rate band widened. Won fell sharply.
1998
Financial Supervisory Agency established
- intensive inspections of major banks
Financial Reconstruction Act implemented
- a system for dealing with bankruptcies
Early Strengthening Act implemented
- capital strengthening via public funds
Nationalization of the Long Term Credit Bank of Japan
Falling credit ratings, the Japan premium, credit-crunch
1999
Financial inspections manual published
1
Capital injected to 15 major banks and 4 regional banks
Chronology of Events in the 2000’s
Japan’s Non-Performing Loan Problem in the 2000’s
The 2000’s
Normalization of the non-performing loan problem
2000
Financial Services Agency (FSA) was established (Good supervision!)
Amendment of the Deposit Insurance Law
- introduction of permanent measures against financial crises (Article 102.)
2001
Write down of non-performing loans promoted
Special inspections were implemented (major banks)
2002
Announcement of the Financial Reconstruction Program
2003
Capital strengthening for a major bank (Resona Bank)
Temporary nationalization of a major regional bank (Ashikaga Bank)
2004
Announcement of the Financial Reform Program
2005
Temporary protection of all deposits ended
Target of reducing non-performing loan ratios to half at major banks
achieved (end of March 2002, 8.4%
end of March 2005, 2.9%)
FSA launched an initiative toward “Better Regulation”
2
2007
3
Deposit Insurance Law ( Article 102.)
 The measures stipulated in the Deposit Insurance Law, Article 102 can be taken
when an extremely serious threat is posed to the maintenance of the credit
system in Japan or region where financial institutions are conducting operations.
Thin capital
Capital Injection
(Item 1)
Follow-up of
business
recovery plan
implementation
Formulation of
business
recovery plan
Capital injection by DICJ
Material
Financial
Distress
Failed
or
Insolvent
Financial
assistance to
protect 100%
deposits
(Item 2)
Appointment of
financial
administrator
Successor
seeking
process
Transfer to
successor
Financial Assistance
by DICJ
Failed
and
Insolvent
Special crisis
management
(Item 3)
Nationalization
*It should be funded through ex-post deposit insurance premiums,
and not by taxpayers’ money
Successor
seeking
process
Transfer to
successor
Financial Assistance
by DICJ
Japanese Banks’ Non-performing Loan Rate
Non-performing loan rate disclosed
Non-performing loan rate disclosed
based on the Financial
based on the Banking Act
Reconstruction Act
4
Real Estate Prices
Real estate prices （indices with prices in 2000 as 100）
Average for all type of real estate
For commercial use
For housing use
For industrial use
5
１．Stock Price (Nikkei Average)
6
Number of Bank Failures
Number of bank failures
FY
Total
Number of cases
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Total
0
1
1
2
4
6
5
17
30
44
14
56
0
1
0
0
181
Banks
0
1
0
0
0
2
1
3
5
5
0
2
0
1
0
0
20
Shinkin
Banks
0
0
1
1
0
0
0
0
0
10
2
13
0
0
0
0
27
Cre dit
Coope rative s
0
0
0
1
4
4
4
14
25
29
12
41
0
0
0
0
134
7
Achievements of Industrial Revitalization Corporation of Japan
Corporate Overview
Name: Industrial Revitalization Corporation of Japan (IRCJ)
Capital: 50.507 billion yen
Number of Employees: 214 (as of the end of February 2005)
President: Atsushi Saito (Director & Representative Executive Officer, Group CEO of Japan Exchange Group, former Executive Vice President of Nomura Securities)
 Industrial Revitalization Corporation Act (the “Act") was enacted and came into
force in April 2003 for the purpose of establishment of IRCJ.
 IRCJ was established on April 16, 2003, began operations in May, and
disbanded on March 15, 2007.
 Since its establishment, IRCJ made decisions to support 41 projects (19
involving large corporations) including Daiei and Kanebo before the deadline
for credit purchase application on March 31, 2005.
 Completed support for all projects, and contributed to securing employment.
 Total number of employees for the 41 projects at the time of support decision exceeded 70,000.
 Japanese public did not incur any resulting debts.
8
Programs for Final Disposal of Non-performing Loans (1)
1. Emergency Economic Measures (April 6, 2001)
・ Allowing off-balance-sheet treatment for major banks for credit extended to borrowers in
danger of bankruptcy or below; within 2 years for existing loans and 3 years for new loans.
(the 2-and-3-year rule)
・ Requesting an institutional arrangement for normalizing special attention loans and doubtful
loans.
・ Formulation and announcement of a guideline regarding out-of-courts workouts.
2. Basic Policy for Fiscal and Economic Management and for Economic
and Social Structural Reform (June 26, 2001)
・ Disposal of non-performing loans and corporate turnaround through the Resolution and
Collection Corporation (RCC) based on drastic enhancement of functions of the RCC
・ Adequate grasp of the overall non-performing loan problem, referring to such new indices as
non-performing loan ratio and credit cost ratio
3. Advanced-Reform Program (October 26, 2001)
・ Conducting special inspections of major banks
・ Flexible pricing method for RCC’s purchasing of non-performing loans (purchase at market
values)
・ Promotion of establishment of corporate turnaround funds
・ To overcome the non-performing loan problem within 3 years or by the end of the intensive
adjustment period at the latest by concurrently promoting structural reforms in other areas
9
Programs for Final Disposal of Non-performing Loans (2)
4. Measures against deflation to be promptly implemented
(February 27,
2002)
・ Rigorous implementation of special inspections and announcement of their results
・ Proactive purchase of non-performing loans by RCC
5. Policy measures for establishing a further robust financial system
(April 12, 2002)
・ For credits extended by major banks to borrowers likely in danger of bankruptcy or with lower
creditworthiness, off-balance-sheet treatment was further accelerated with specific disposal
targets (in principle 50% to be disposed within a year and most of them—about 80%—within
two years (the 50/80% rule)) and with proactive utilization of RCC functions including trust.
・ Introduction of year-round inspection of major banking groups by specialized inspectors in
charge of each group
・ Measures for promoting mergers of financial institutions
6. Financial Reconstruction program （October 2002）
・ As a framework for establishing a further robust financial system, the following measures
were taken:
1) Tightening of asset assessment at major banks including the revision of asset assessment
standards, implementation of special inspections and strengthening the administrative penalty
for inadequate correction of self-assessments
2) Improvement of capital bases through tax reforms to strengthen equity capital and the
confirmation of rationality of deferred tax assets
3) Enhancement of governance including the conversion of government-held preferred stocks to
10
common stocks
Financial Reconstruction Program
Financial Reconstruction Program
－Economic Reconstruction Through Solving the Major Banks’ Non-Performing Loan Problem－
Economic
by
major banks’
non-performing
loan
Economicreconstruction
reconstruction
bysolving
solvingthe
the
banks’
non-performing
loanproblem
problem
– key
elements
aremajor
solving
the major
bank non-performing
loan problem and progressing structural reforms
–
key
elements
are
solving
the
major
bank
non-performing
loan problem and progressing structural reforms
Forcibly reinvigorating the economy while attempting to minimizing hardship
Forcibly reinvigorating–the
economy while
attempting
to minimizing
implementing
an integrated
policy
combininghardship
measures for employment and also for medium-to-small businesses
– implementing an integrated policy combining measures for employment and also for medium-to-small businesses
《1. A New Framework for the Financial System》
(1)Constructing a reliable financial system
・Financial administration for the benefit the Japanese people
・Maintaining a stable clearing function
・Establishing a monitoring system
(2)Sufficient consideration given to lending for medium-to-small
businesses
・Increasing number of lenders for medium-to-small businesses
・Maintaining a framework to support reconstruction for mediumto-small businesses
・Issuing business improvement orders for financial institutions
failing to meet lending targets for medium-to-small businesses
・Carrying-out inspections that capture the actual situation
medium-to-small businesses face
・Maintaining a monitoring system for financing for medium-tosmall businesses
・Establishing a hot-line for tight lending practices and retraction
of credit
Inspection of tight lending practices and retraction of credit
(3) End of non-performing loan problems by FY2004
・Development of an integrated support system provided jointly by the
government and the Bank of Japan
・Management reforms at Special Support Financial Institutions
・Foundation of a new public funding system
《2. A New Framework for Company Reconstruction》
(1) Company reconstruction via “special support”
・Shift to off-balance for financial receivables
・Utilizing self-inspections for market-value reference information
・Guarantee system for DIP financing
(2) Increased use of RCC and company reconstruction
・Strengthening the company reconstruction function
・Bolstering collaboration with the Company Reconstruction Fund
etc.
・Establishing a transaction market for financial receivables
・Enhancing the securitization function
(3)Maintaining an appropriate environment for company
reconstruction
・Maintaining an environment that assists company reconstruction
・Responding to problems such as excessive lending etc.
・Establishing guidelines for early company reconstruction
・Dealing with share-value fluctuation risk
・Planning for further deregulation for companies
(4)A new framework for the reconstruction of business and
industry
《3. A New Framework for Financial Administration》
(1) Raising standards for asset valuation
Raising standards for asset valuation
・Review of standards for asset valuation
－Adoption of DCF methods for reserve funds
－Review of time period for calculation of reserve funds
－Thorough verification of rebuilding plans and collateral
valuations
・Re-implementation of special inspections
・Difference between self-inspection evaluations and FSA
inspection evaluations published
・Bolstering administration to correction inadequate self-inspections
・Declaration of the accuracy of financial statements by managers
(2) Supplementing equity capital
・Revising tax system to strengthen equity capital
・Checking rationality of deferred tax-assets
・Introducing external audits to verify equity ratio
(3) Fortifying Governance
・Changing preferential stocks to common stocks
・Issuing business improvement orders for companies failing to
achieve financial soundness targets
・Increasing severity of early correction measures
・Utilizing a early warning system etc.
Early implementation (targeting November of the current year to create and announce an action timetable)
* An action plan for the disposal of non-performing loans for medium to small sized and regional financial institutions was targeted for implementation within 2002
Basic philosophy
Restoring trust in the Japanese financial system and financial administration,
realizing financial markets highly regarded around the world
Reducing the non-performing loan ratio of major banks in-half by 2004, then aiming to
normalize the problem
Targeting the creation of a strong financial system with the support of structural reforms
11
Lessons (1)
1. Early identification of and early responses to problems


Implementation of asset assessment based on rigorous standards, early recognition of
(reserve for) losses and timely disclosure are indispensable
Framework that enable supervisory authorities to make objective judgment is effective
for ensuring early identification and early responses.
2. Prompt measures dealing with financial institutions’
undercapitalization; and implementation of smooth failure resolution
and crisis management



In case recognition of losses from non-performing loans makes the financial institution
undercapitalized, a prompt and sufficient increase in capital is needed.
In case private-sector’s efforts for increasing capital have limitations, a mechanism for
increasing capital with public funds is effective as the ultimate safety net.
It is important to establish a system for smooth failure resolution and crisis management of
financial institutions taking systemic risks into consideration.
3. Use of public funds requires public understanding

To promote public understanding (1) strong pressure for normalizing the business
management, (2) actions to call to bring the managers and the shareholders responsible to
account, and (3) securing of taxpayers’ benefits, are necessary.
12
Lessons (2)
4. Fundamental resolution of the non-performing loan problem
requires the off-balance-sheet treatment, corporate turnaround and
recovery of the economy



Banks’ accounting recognition of losses alone would not restore market confidence. It is
necessary to remove the non-performing loans from the balance sheet through the use of
purchase of credits by public institutions.
Concurrently, measures for corporate turnaround with public institutions involved would
contribute to decreasing non-performing loans and to recovery of the economy.
Recovery of the economy is indispensable for fundamental resolution of the nonperforming loan problem, which requires smooth supply of funds to corporations
—i.e., maintenance and expansion of banks’ function of extending credit.
5. Reinforcement of banks’ self-discipline for preventing recurrence
of the non-performing loan problem

Reinforcement of banks’ credit examination is needed. Especially enhancement of internal
control and governance to prevent loose lending is important.
13
Act on Special Measures for Strengthening Financial Functions
Act on Special Measures for Strengthening Financial Functions
(August 1, 2004 )
In an environment where financial institutions had difficulty in securing financing on their own, provide sufficient funding
through capital participation via public fund injection so that the financial sector can voluntarily commit to risk taking and
function as financial intermediaries in the regional economy.
(Temporary measure expired at the end of March 2008)
Amended Act
(December 17, 2008)
September 15, 2008 Lehman Brothers bankruptcy
With the external factors such as disruption of global financial market potentially becoming significant obstacles to
financial sector's function as intermediary by impacting their capital adequacy, the Act was to be utilized to enhance their
intermediary functions and provide support to regional economy as well as small and medium enterprises that face severe
conditions. (extended until the end of March 2012)
Special earthquake-related provisions
(July 27, 2011)
March 11, 2011 Great East Japan Earthquake
With concerns over various effects from the Great East Japan Earthquake on the financial sector, special earthquakerelated provisions for the Act was established to maintain and enhance financial functions in the affected areas and
provide comfort to the depositors.
(re-extended until the end of March 2017)
14
14
Act on Special Measures for Strengthening Financial Functions
(Amended Act enacted on December 17, 2008)
Summary of the Act on Special Measures for
Strengthening Financial Functions
Purpose: revitalizations of regional economies by strengthening financial functions through central
government’s capital participation to the financial sector.
Application (*Deadline: End of March 2012)
Prepare and submit management enhancement plan with
the statement;
1) Plan period (maximum of 3 years)
2) Profitability and efficiency targets, and schemes to
achieve such targets
3) Establishment of a responsible management system
including revision of the previous management system
4) Measures to contribute to revitalizations of regional
economies, such as facilitating credit granting to SMEs.
5) Amount and contents of underwriting of stocks, etc.
Examination
Government will inject capital if the following criteria are
met:
1) Improvement of profitability and efficiency is
expected;
2) Facilitating finances for SMEs in the region, etc. is
expected;
3) Collecting public funds is not difficult;
4) Assets are properly evaluated;
5) The financial institution is not in bankruptcy or
insolvency; and
6) Certain share in the region, etc. for Cooperative
Structured Financial Institution, etc.
Ex Post Facto Check:
(i) Financial institutions report progress of the plan to the authority semi-annually
(ii) FSA publishes the progress report and follow up (take supervisory measures as necessary)
*Government guarantee amount:12 trillion yen
15
Securing the Smooth Functioning of Financial Services
16
Background (Circumstances after the Financial Crisis in Japan)
Non-performing loan problem substantially overcome by 2005…
- Downsizing a front office in the context of
business restructuring
- More conservative lending attitude to
prevent non-performing loans from
increasing.
1. Development of
Better Regulation(2007.7~)
Crisis Period: late 1990s – early 2000s
・ Establishment of legislation
to tackle financial crisis
・ Need of strong financial supervision
(active on-site inspection)
to mitigate market concerns
Publication of a new initiative
“Better Regulation” by FSA in 2007
・ Highlight of cooperation with financial
institutions in the financial inspection
・ Increase in transparency and foreseeability
of the authority through more extensive
information sharing and dialogue with
financial institutions
・ Respect of exerting self-initiative of
financial institution
Credit
Crunch
SMEs…struggled with
refunding their debt
Large enterprises…
with sufficient self-funds,
less dependent on banks
Exhausted
Regional economy
2. Act concerning Temporary Measures to
Facilitate Financing for SMEs (2009.12~)
Point of the Act…
・The obligation was prescribed to prompt financial institutions to review the loan
terms when requested by SMEs to ease debt service burden
Expiry of the Act…
・ Expiry of the Act, which was originally set in March 2011, was extended one year
twice. FSA announced that FY 2012 was the final year.
Application so far
・ Among total 4 million SMEs,
SMEs allowed to ease debt service burden:
300~400 thousand
SMEs needed fundamental revitalization of business/change of business:
50~60 thousand
Statement by Minister…
・ Policies for inspection and supervision after the expiry of the SME Financing Act
was released in November 2012.
- The FSA will continue to encourage financial institutions, through inspection and
supervisory processes to make efforts to modify the terms of the loans and ensure
the smooth provision of funds
Ongoing work (as of March 2013)
・ The FSA has shifted emphasis to the business rehabilitation of SMEs and is
implementing measures included in the “Emergency Economic Measures for
The Revitalization of the Japanese Economy(Jan, 2013)”
Develop/Enhance A Support System through Cooperation among Japanese Financial Sector, JBIC,
JETRO, etc. for SMEs to Enter Markets in Asia Region
Asia Region, etc.
JBIC
(Representative
Offices)
Announced December 21, 2010
By FSA, MOF, METI
Japan
Information/consultation
JETRO
(Domestic and Overseas
Offices)
Japanese Financial
Sector
Dispatch of Personnel
Information/
Consultation,
etc.
Information/consultation,
etc.
Loans
Japanese financial sector to cooperate with Japan Finance Corporation (SME Unit),
Shokochukin Bank, Development Bank of Japan, Organization for Small & Medium
Enterprises and Regional Innovation, and overseas Japanese Chamber of Commerce
and Industry, etc. as required (overseas business expos, etc.).
Guarantee
Information/Consultation, etc.
Information/
Consultation, etc.
Japanese SMEs
(Parent Company)
Enter Markets in Asia Region
Dispatch of Personnel
Local Subsidiary
of SMEs
Information/Consultation, etc.
Guarantee
Japan Desk
Local Financial Institutions, etc.
(Asia Region)
Loans
Information/consultation, etc.
Execution of MOU
JBIC
• Japan Desk
• Information, etc.
Note: Further review on details including financing (loan, guarantee, etc.) methods.
Note: JBIC loan (two-step loan) shall be syndicated loans with interested Japanese financial institutions (regional financial institutions, megabanks, etc.) in principle.
17
Issues for Regional Banks' Entry into Asia
 Securing profitability from business alliance with local banks against competition with
Japanese megabanks that have local branch offices and other regional banks with
similar strategies.
1. Competition with Other Banks
• Competition with megabanks that have local branch offices (local currency loans)
• Competition among regional banks (cost of issuing letters of credit/quality of information
provided)
⇒ If a customer is snatched by another bank in an overseas market, the same may happen in
Japan
2. Securing Profitability for Business Alliance with Local Banks
• Business expos have become one of the established and stable overseas business
support models, but it remains a support tool, and is yet to produce profits through
business matching (customers do not feel obligated to pay fees).
• Overseas business support through representative offices have limitations in terms of
acquiring information and building profit models, and are positioned as career development
opportunity and/or a service tool.
*based on interview with Regional Banks Association of Japan
18
Support of Financial Infrastructure Development in Asia (1)
Restriction on Activities by Japanese Corporation in Asia
 Lack of financial infrastructure (legal and settlement systems, etc.) that form the foundation of funding,
settlement and investment in local currency.
 Regulations on transactions/loans in local currency under market conditions with inadequate financial
infrastructure.
Support of Financial Infrastructure Development in Asia:
Provide technical support to Asian countries for development of financial infrastructure (legal and settlement
systems, etc.) to secure smooth funding for overseas activities by Japanese corporations.
1.Support development of financial infrastructure together with request for deregulation.
2.Make a national commitment, with cooperation among related government authorities and private sector
⇒ Support activities of Japanese corporations in Asia zone financially, and contribute to economic
development.
Key examples (see details on the next page)
 Myanmar: Establishment of Securities Exchange Act (cooperation with Ministry of Finance, Policy
Research Institute ("PRI")), support for the development of securities supervision system
(cooperation with JICA), etc.
 Vietnam: Knowledge-based support for non-performing loan administration (cooperation with
JICA), support for the establishment of securities market (improving quality of securities
companies), etc.
19
Support of Financial Infrastructure Development in Asia (2)
◆ Myanmar
• Establishment of Securities Exchange Act (cooperation with PRI)
 PRI executed MOU with Bank of Myanmar concerning support for the establishment of the Securities Exchange
Act.
 Government of Myanmar is aiming to establish the stock exchange within 2015.
 Working group including PRI, FSA, JICA, academics, law firm and Daiwa Institute of Research discussed
comments on the bill prepared by Myanmar.
 Lecture offered on the Japanese legal and supervisory system to Myanmar authorities.
• Support for the development of securities supervision system (cooperation with JICA)
 Preliminary research and dispatch of public-and-private sector mission to support securities supervision in
conjunction with the establishment of the Securities Exchange Act.
 In response to request by Bank of Myanmar, long-term secondment of FSA staff is scheduled to begin from
summer of 2013 to advise on financial supervision and enhancement of financial administration capacities
◆ Vietnam
• Knowledge-based support for non-performing loan administration (cooperation with JICA)
 JICA project, in cooperation with Ministry of Finance, Daiwa Institute of Research, law firm, etc.
 Lecture offered on related legal system to Ministry of Finance and central bank authorities.
• Support for the establishment of securities market
 In response to request for knowledge-based support from Vietnam, performed research to identify specific needs.
 Improvement of quality of securities companies (licensing, evaluation criteria, supervision method) was identified
as priority issue.
 Training for the Securities Commission of Vietnam and Ministry of Finance authorities is being planned.
20